Rul­ing against sub­si­dies could hit hos­pi­tal stocks harder than earn­ings

Modern Healthcare - - NEWS - By Beth Kutscher and Me­lanie Evans

Hos­pi­tals and in­vestors are bank­ing on the U.S. Supreme Court or the states to save pre­mium sub­si­dies that have made health in­sur­ance af­ford­able for 6.4 mil­lion peo­ple in 34 states. But the stocks of pub­licly traded hos­pi­tal com­pa­nies could take a big hit if that doesn’t hap­pen.

Hos­pi­tal ex­ec­u­tives are ner­vously an­tic­i­pat­ing the high court’s im­mi­nent rul­ing in King v. Bur­well, which could in­val­i­date pre­mium tax cred­its in up to 37 states us­ing the fed­eral ex­change. Their prepa­ra­tions have var­ied widely, with some say­ing their strat­egy is watch­ful wait­ing. The Amer­i­can Hos­pi­tal As­so­ci­a­tion has hired con­sul­tants Manatt Health So­lu­tions to work with state hos­pi­tal as­so­ci­a­tions to de­velop con­tin­gency plans.

Ur­ban safety-net, ru­ral, faith-based and aca­demic hos­pi­tals are most likely to feel the im­pact, said Guy Col­lier, a part­ner at law firm McDer­mott Will & Emery.

Hos­pi­tals will see un­paid bills and char­ity care in­crease as lower- and mid­dle-in­come pa­tients “go back to be­ing at fi­nan­cial risk with­out re­sources to take care of them­selves,” said Marvin O’Quinn, chief op­er­at­ing of­fi­cer for San Fran­cisco-based Dig­nity Health sys­tem. St. Louis-based As­cen­sion Health, which op­er­ates in 23 states and has 131 hos­pi­tals, will rely on char­ity care and billing poli­cies pre­vi­ously in place if sub­si­dies go away, said An­thony Ter­signi, As­cen­sion’s CEO.

If the court de­cides against the sub­si­dies, the jus­tices po­ten­tially could de­lay a cut­off. “If it does get dis­rupted, we would have, we hope, a tran­si­tion time,” said Kevin Bren­nan, chief fi­nan­cial of­fi­cer of Geisinger Health Sys­tem, based in Danville, Pa. In that state, Demo­cratic Gov. Tom Wolf re­cently pro­posed a plan to cre­ate a state-based ex­change to pre­serve sub­si­dies, but his plan may face a tough slog in the Repub­li­can-con­trolled Leg­is­la­ture. Eight out of 10 of the 400,000 peo­ple in­sured through Penn­syl­va­nia’s fed­eral ex­change re­ceive sub­si­dies amount­ing to 75% of the cost of the av­er­age bronze-tier plan, said Andy Carter, CEO of the Hos­pi­tal and Health­sys­tem As­so­ci­a­tion of Penn­syl­va­nia.

Other health sys­tems are sim­ply cross­ing their fin­gers that the jus­tices will keep the sub­si­dies. “I know hope is nor­mally not a strat­egy, but in this case we are very hope­ful that we don’t get an ad­verse de­ci­sion, just be­cause of the im­pli­ca­tions,” said Michael Abrams, CEO of the Ohio Hos­pi­tal As­so­ci­a­tion.

Po­lit­i­cal and legal hur­dles to es­tab­lish­ing a state-based ex­change vary by state, depend­ing on whether the gov­er­nors are em­pow­ered to act on their own or need leg­isla­tive ap­proval, said Richard Pol­lack, who takes over as the Amer­i­can Hos­pi­tal As­so­ci­a­tion’s CEO in Septem­ber. State hos­pi­tal as­so­ci­a­tions are draft­ing con­tin­gency plans for op­er­at­ing state-based ex­changes— from en­roll­ment to con­sumer over­sight to fi­nanc­ing—and con­sid­er­ing what agen­cies or con­trac­tors might do the work, he said.

Craig Becker, pres­i­dent of the Ten­nessee Hos­pi­tal As­so­ci­a­tion, said his state’s con­ser­va­tive Repub­li­can Leg­is­la­ture would have to ap­prove and fund a state-based ex­change. “It’s go­ing to be a chal­lenge,” he said.

Ten­nessee of­fi­cials an­tic­i­pate that knock­ing out the sub­si­dies would rip­ple through the en­tire in­di­vid­ual in­sur­ance mar­ket. “We’re look­ing at 280,000 who lose their sub­si­dies and we fig­ure most of those will come off the rolls,” Becker said. “That will re­ally mess up the in­di­vid­ual mar­ket, which is al­ready talk­ing about in­creas­ing rates by 34% in our state.”

Some health sys­tems with small num­bers of pa­tients in­sured through the fed­eral ex­change ex­press less con­cern. “It’s not that big of a piece of our busi­ness right now,” said Gary Brock, pres­i­dent and chief op­er­at­ing of­fi­cer of the North Texas di­vi­sion of Dal­las-based Baylor Scott & White Health. Ex­change rev­enue ac­counts for roughly 1.2% of his sys­tem’s rev­enue.

The loss of sub­si­dies and cov­er­age would come as the feds plan to cut $270 bil­lion from Medi­care and Med­i­caid in the next decade. “If you have th­ese cuts and you don’t have (th­ese) newly in­sured pa­tients, the pic­ture is

pretty grim for hos­pi­tals,” Col­lier said.

Stock mar­ket in­vestors—who have re­warded hos­pi­tal chains over the past two years as earn­ings re­sults have con­tin­u­ally sur­passed ex­pec­ta­tions—seem con­fi­dent that the court will up­hold the sub­si­dies or else the states will take ac­tion to keep them. In a sur­vey con­ducted by in­vest­ment bank RBC Cap­i­tal Part­ners, 65% of re­spon­dents pre­dicted the sub­si­dies would be up­held. A com­bined 85% in­di­cated that “most” or “some” states would adopt work­arounds. But that op­ti­mism could mean that share prices will take a ma­jor hit if in­vestors are shocked by court and state ac­tions that go the op­po­site way.

Paula Torch, an an­a­lyst at Avon­dale Part­ners, said hos­pi­tal com­pa­nies will see grow­ing rev­enue and earn­ings no mat­ter which way the rul­ing goes. The im­prov­ing econ­omy, the vol­ume uptick from the ACA’s Med­i­caid ex­pan­sion and strate­gic ef­forts to bring in ad­di­tional pa­tients will con­tinue to boost earn­ings, she pre­dicted. “The im­pact (of a rul­ing against the sub­si­dies) is go­ing to be more to the stocks” than to earn­ings, she said.

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